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e..srMn~ ~~~~~ " ~~~ RICHARD H. MOORS TREASURER North Carolina Department of State Treasurer State and Local Government Finance Division and the Local Government Commission T. Vance Hoaoman DEPUTY TREASURER May 21, 2007 TO: FROM: SUBJECT: Memorandum #1079 Local Government Officials and Certified Public Accountants Sharon Edmundson, Director, Fiscal Management Section Worker Status: Employee or Independent Contractor? This memo covers the concerns and issues associated with the classification of local government workers as either employees or independent contractors. The Internal Revenue Service (IRS) has examined the worker status decisions of several North Cazolina local governments and where they have identified instances of employees incorrectly classified as independent contractors they have assessed back taxes, interest and penalties. This memo will review the differences in the treatment of employees and independent contractors and the consequences of misclassifying a worker. It will discuss the factors for determining worker status as set forth by the courts and the IRS. It will also discuss the classification of different types of local govemment workers. When a worker is classified as an employee, the employer is required to withhold-the employee share of social security and Medicare taxes, and usually income taxes, from the employee's pay. The employer also pays the employer share of social security and Medicare taxes along with unemployment taxes. The employer is required to report the employee's earnings and tax withholdings on form W-2 for the calendar year. The employer also must pay the taxes due at a certain frequency based on the tax liability of the unit as a whole. In most cases, the payments are made by a tax deposit with a commercial bank. In addition, the employer is subject to other legal requirements related to worker's compensation, overtime (wage and hour laws) and anti- discrimination rules. Employees also may be eligible for coverage under various benefit programs offered by the employer. When a worker is classified as an independent contractor, the contracting organization is not required to withhold income, social security, and Medicare taxes or pay the employer portion of social security and Medicare taxes. Also, they are not liable for unemployment taxes. The contracting organization reports earnings of $600 or more on Form 1099-MISC.. In addition, the contracting organization is not subject to worker's compensation, wage and hour laws and most other anti-discrimination rules that employers are subject to. To a local government, it may first appear there is a significant savings in classifying workers as independent contractors instead of employees. However, there is a potential significant cost 325 North Salisbury Street, Raleigh, North Carolina 27603-1385 Telephone: (919) 807-2350 Fax: (919) 807-2352 Website: www.nctreasurer.com An Equal Opportunity/Affirmative Action Employer